Technical Analysis: The Fibonacci Retracement

It’s all about getting ahead of the pack.

The more well prepared you are, the more likely it will happen.  While we’ve spoken in-depth about many momentum indicators up until this point to do just that, there’s another one that deserves just as much attention –Fibonacci Retracement Levels.

Retracement levels are based on the belief that stocks, currencies and indices tend to retrace their paths after a big move in a single direction.  You first find your two extremes – a peak and a trough – and then divide by key Fibonacci ratios, such as

23.6%, 38.2%, 50%, 61.8%, and 76.4%. All are used to forecast the extent of a potential pullback or move higher.


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Once those levels are found, we then draw our horizontal lines at each % marker to define points of support and resistance.  For reasons that aren’t entirely clear to all traders, these ratios play a big role in the market to determine critical points that can send a stock back up, or back down. 

Should such an indicator be used by itself?

Of course not… There will never be a time when it’s okay for a sole technical indicator to be used.  Combine it with other tools, like Bollinger Bands, relative strength (RSI), MACD, Money Flow (MFI), or even Williams’ %R (W%R).

Look at the U.S. Dollar for example.  Notice how the retracement levels clearly define support and resistance points along the way.  Most recently, the dollar broke through the 50% retracement level.  Now we wait to see if the 61.8% holds at 98.47.

We can already tell by looking at other indicators – such as RSI and MACD – that the dollar is oversold.  Now we wait for further confirmation from Fibonacci.  While such charts may not seem useful, they truly are, especially when used with other strong technical pivots.

It’s just another strong tool to keep in your trading arsenal.


Learn to Trade Fibonaccis Like a Seasoned Pro. Apply Your Knowledge
and Skills and Get Paid To Trade! Learn How Here